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10/19/2006
How To Invest In College Towns — Not Just The Kids' Education
By David Devoss
Investor's Business Daily
After years of impressive growth, home values across the U.S. are starting
to plateau.
So how can the real estate-minded hunt for returns? One place to look is the student housing market on and around college
campuses, advises Michael Zaransky, co-CEO of Prime Property Investors of
Northbrook, Ill.
"This multihousing niche is growing because of demographics," said Zaransky,
who wrote "Profit by Investing in Student Housing: Cash in on the Campus
Housing Shortage." "About 80 million echo boomers born between 1982 and 1995
will turn 18 over the next 10 years. These children of the best educated and
most affluent generation in America's history will be attending universities
whose obsolete dormitories, on average, have beds for only 30% of today's
enrollment."
On some campuses the housing shortage is critical. At Arizona State
University in Tempe, the University of New Mexico in Albuquerque and the
University of Nevada in Las Vegas, only about 10% of the student body has
university housing.
For some parents, buying an off- campus condo can be a wise investment,
especially if they finance it with a "kiddie condo loan" through the Federal
Housing Administration. These take only a 3% down payment and let a student
use a blood relative's cash and credit standing to finance the buy. The
condo qualifies for all the tax advantages of a primary residence since it
is considered owner-occupied, and renting space to roommates is allowed.
Investing in a kiddie condo can provide attractive long-term income. And it
can cut the cost of a student's room and board, which the College Board says
averages $8,000 a year at private universities.
Raising The Rents
Zaransky, whose company manages 15 dormitories on five campuses, says
student housing can offer specific benefits to investors.
While National
Multi Housing Council data show traditional apartments have 85% occupancy on
average and annual rent growth of 3%, he says, his firm's units at Purdue
University in West Lafayette, Ind., are 100% occupied with 13% rent growth.
Thirteen percent increases may not be typical except around campuses like
the University of Wisconsin in Madison and the University of California in
Irvine, but 7% rent growth is, says an NMHC survey of 64 college towns. And
a school's academic standing is irrelevant to return on investment.
"The
freshman class in many feeder universities is growing by 500 students a
year," said Jim Arbury, NMHC senior vice president. "That's a couple of
off-campus housing properties."
Instead of focusing on Harvard or Yale, Arbury says check out Western
Michigan University in Kalamazoo and the University of Central Florida in
Orlando, where enrollment has jumped from 1,948 students in 1968 to 47,000
now.
For those who can't afford to purchase a multiunit building, one way to
participate in the $160 billion student housing market is through one of
three real estate investment trusts: American Campus Communities, Education Realty Trust
and GMH Communities Trust. In the first half of 2006, equity REITs overall had a 16.12% total return
(price appreciation and dividend), says the National Association of Real
Estate Investment Trusts. During that time, American Campus Communities
returned 10.07% and Education Realty 28.76%.
Over the past year the stock
prices of those two and GMH underperformed the S&P 500 — while over the past
two years American Campus Communities outperformed it.
Public universities prefer to spend tax dollars on academics, so when new
dorms are needed they often turn to outfits like Austin, Texas-based
American Campus Communities. It manages 53 on- and off-campus properties
with 32,000 beds.
"For most campus housing, we create a 501(c)(3) corporation, which develops
land leased from the university by issuing tax-exempt bonds," said William
Bayless, the company's president. "We receive fees for arranging financing,
monitoring development and managing the resulting property."
Universities work with developers to spur mixed development nearby.
For
some, such as Philadelphia's Temple University and the University of
Pennsylvania, redoing decrepit areas is a matter of survival. For others,
such as Illinois State University in Normal, a modern gateway boosts school
image.
Backed by $200 million from the New Boston Fund, Fairmount University Realty
Trust in Cleveland has become a big player in such development. Its
University Circle — featuring restaurants and shops — on the periphery of
Case Western Reserve University draws 70,000 people daily. Also planned: a
$60 million redevelopment in Normal and a 40-acre mixed-use center by
Virginia Tech in Blacksburg.
Demand Generation
"Urban mixed-use developments often revolve around a nonretail demand
generator such as a city hall, regional library or cultural arts center,"
said Fairmount principal Randy Ruttenberg. "We believe a college or
university can be the quintessential example of a nonretail demand generator
in that it attracts students, faculty, administrative staff and their
families."
Fairmount surveyed 350 schools for such development. "Universities have to
compete for students, faculty and alumni interested in lifelong learning
programs," Ruttenberg said. "Our goal is to create pedestrian-oriented
places where students and faculty can join with the community to live, dine
and shop."
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